Considering using Mezzanine Debt on your next Development, because your Equity is still tied up in the last one? There can be a better way...
With sales now taking longer to lock in and settle, property developers often have unsold stock when construction has completed, which can leave them either being unable to payout the construction debt, or having equity tied up that is needed for the next project. This is often a problem because equity and profits naturally lie in the last units/lots.
Property developers often look at the funding for their projects on a stand-alone basis, even when they have multiple projects at the various phases of:
Land-banking, working on DA
Pre-construction post-DA, working on marketing, design and build tender
Finally, completed but still selling down the remaining stock
When developers have multiple projects in their pipeline at varying stages, there's many ways to juggle the debt and equity. The two main ways we see developers do this are:
Doing everything with one bank (are you saying to yourself "I'm loyal to them and they've always looked after me"?), which if seeking debt for land-banking or pre-construction, often involves the bank taking a cross-collateralised security position across multiple projects or assets (click here for a quick read about how badly that strategy can go!); or
Using Mezzanine Debt or Capital Partners (i.e. money at high interest rates or profit share) to fund the required equity in the next project, pending getting equity back out from the project that's nearly finished or has completed but is still selling/settling .
Working on a holistic basis can deliver better outcomes at a lower Cost of Capital
If you're just about at the end of construction, or have actually completed and are in the sell-down phase, there can be a better way. One that is safer than cross-collateralising assets with one bank, and cheaper than Mezz or external Equity.
When we recently completed a full group review of a developer's pipeline - including assets, debt facilities and equity requirements - they were in this position, needing to settle their next site but still having some unsold stock, or sold but not yet settled, in their last project.
Rather than turning to high-LVR Mezzanine Debt facility for the construction of a project, we restructured the debt facilities of the recently completed project, by negotiating a Residual Stock Facility, at the following terms:
Gearing: 70% LVR
Interest rate: 6.99%
Depending on (1) the amount of debt required, (2) the LVR and whether the remaining units are on a progressive sell-down strategy or (3) to be kept long-term and rented out, the cost of residual stock facilities can range from rates as low as 5.5%, to rates north of 10%.
Or use it to get out of Mezzanine Debt
This strategy can also work well for developers that have paid out the Senior Debt lender from settlements, but still have Mezzanine Debt remaining from the construction debt, usually accruing interest at a rate of 20% or more. If it's likely to take a few months or more to clear out the mezz, refinancing the remaining stock into a Residual Stock Facility can significantly reduce monthly outgoings and provide some valuable breathing space.
If you or a client are in a position similar to these examples (or may become so in the near future), get in touch with us as early as possible so that we can work up optimal strategy options to get the best (and cheapest!) outcomes.